Secondary market annuity (SMA) is a wholly misleading label given to structured settlement payment rights acquired pursuant to a structured settlement factoring transaction [see IRC §5891(C)(2) and §5891(C)(3)(a)] by salespeople seeking to make a profit.
Also known by the more accurate structured settlement derivatives, factored structured settlement, recycled structured settlement payments, or in-force payments. and the misleading secondary market income annuity (SMIA).
While fruits are commonly mistaken for vegetables (e.g. avocados, eggplant, cucumber, okra), that's not the case with the misleading label of secondary market annuity because it's intentional.. One purveyor of structured settlement derivatives stated in a video that it uses the term simply because it is easier to say.
While the accurate term structured settlement payment rights doesn't have the comparable Mary Poppins level of lyrical compatibility as supercalifragilisticexpaladocious, it doesn't nearly rise to the degree of tongue tying as one would have to endure with antidisestablishmentarianism, or Pneumonoultramicroscopicsilicovolcano
The potential for confusion is enormous, particularly when selling to unsophisticated investors or retirees. Some actors in the space have added to the confusion by making unauthorized use of insurance company trademarked logos to enhance the "annuity" illusion.
Warning! A secondary market annuity is not a regulated insurance product. There are risks inherent with such vehicles that do not exist with regulated insurance products. There are no rules regarding solicitation of investors in secondary market annuities and arguably secondary market annuities do not receive the same protections as real annuities do. Investors have been hurt, many of them retirees.
Some actors like the cachet of annuities for obvious reasons, the implication, however untrue, that its a regulated insurance product providing stable income without disclosing transaction risk.
On November 2, 2015, Congressman Elijah Cummings (D-Maryland), then ranking member of the House Oversight Committee, sent a letter to the CEO of Somerset Wealth Strategies significant for the including the question of whether “secondary market annuities” are regulated annuities under Maryland State law; what disclosures are made to purchasers of these “annuities;” the profits made by selling or mediating the sale of these “annuities.” Somerset sold one of these instruments to a retiree who wa supposed to start receiving monthly checks in January 2018, but has as of October 2018 has not been paid one cent on his $150,000 investment. Despite exiting the marketplace Somerset continues to be militant about continuing to maintain the website secondarymarketannuities(dot)com
In a March 29, 2017 decision in Greenwald v Caballero-Goehringer, Delaware Superior Court C.A. No. K14C-04-027 JJC. a Delaware Superior Court judge rejected an attempt to portray structured settlement payment rights as an annuity, stating. "The proposed "structured settlement" was described in the Third Petition as a structure to be purchased through a third party to be facilitated by a Houston, Texas law firm. The "annuity" proposed by the Petitioner was in fact a "receivable purchase agreement" which involved purchase of the rights of payment of a structured personal injury settlement from a California injured party having nothing to do with this case. In other words, the annuitant in the proposed plan facilitated by the Texas law firm was the California claimant, not the Minor. Furthermore, despite the Petitioner describing The Hartford as providing the annuity, the seller of the receivable purchase agreement was Genex Capital. No rating was provided for that entity in the petition. The Court denied the Third Petition, without prejudice":
In an October 27, 2017 decision in Portsmouth Virginia Circuit Court, Judge Johnny Morrison ruled that New York Life Insurance Company could amend its petition to add investors and continue its interpleader motion. Millions of investor dollars are at stake in that single case involving at notorious cases of structured settlement transfer abuse (11 transactions approved in 2 years) that made the front page of the Washington Post on December 30, 2015.
There are no shades of grey here.
If users of the Secondary Market Annuity scam label believe it is an annuity then get a state insurance regulator or the National Association of Insurance Commissioners to opine. Not sure they want an answer. One thing is for sure this does not happen when you simply a regular annuity.
If it's not an annuity, then it follows that calling it an annuity, driven by a profit motive, in a deliberate effort to cause someone to buy it could be considered false advertising or fraud.
The corollary is of course, if it is an annuity then no mention should be made of statutory protections that may apply to annuities in connection with the sale thereof (as the scam labelers like to do) because it would be unlawful.
Even Professor Adam F. Scales, the doyen of structured settlement factoring, did not refer to factored structured settlements by the scam label.
While buying a structured settlement derivative may make sense for some people, unless you're completely informed and have a clear understanding of what you are buying (i.e. not an annuity) and how the risks differ from a real annuity, you should not proceed with the investment.
It is best to deal with a company that is registered and/or licensed to do business in your state.
Make sure you confirm the existence of active professional liability insurance that covers any advice you receive. This is critical because of the misleading use of the term "secondary market annuity". The policy may cover advice concerning annuities but advice concerning SMAs or structured settlement derivatives may not be covered. You don't want to find out if there is a claim.
A number of lawsuits have arisen over the past several years seeking to overturn transfer orders. A notable example was a cluster of deals that were originated by Chevy Chase based Access Funding (now Reliance Funding), that found their way to individual investors through various intermediaries and are at the center of lawsuits by the Maryland Attorney General, the Consumer Financial Protection Board and a victims' class action. Some payments have already been suspended pending the outcome of the litigation and orders may eventually be vacated. There is a plethora of new discovery occurring that could give rise to potentially actionable challenges in the future.
Investors in structured settlement derivatives can now avail themselves of insurance placed through certain underwriters at Lloyds of London, that provides some protection against the transaction risk of overturning approved structured settlement transfer orders. Note that defense costs ARE NOT covered! The insurance cover became available May 1, 2017.
For investors, the policy is first taken out by the structured settlement factoring company and then the investor is added, at an extra cost at the point of sale on a pay as you go basis.
Note that this is a separate and distinct cover from professional liability/ errors & omissions coverage. Coverage limits are a maximum of $1 million so that may not be sufficient on big deals or in the aggregate. More details here
Check out this video making light of the use of the misleading term Secondary Market Annuity
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